The World Health Organization (WHO), on March 11, formally declared the coronavirus epidemic to be a pandemic. The week before, the seriousness of the situation was recognized by investors and economists. A month before that, a pandemic with hundreds of thousands and millions of infected was considered unlikely, so no one tried to calculate its consequences. Now, this scenario is considered along with softer ones.
In early February 2020, economists focused only on epidemics of the recent past. It is important to understand that older episodes are not suitable for this analysis because the principles of the world economy in the beginning-middle of the XIX century were entirely different. A massive outbreak of SARS in 2003, is taken as the basis, but it also cannot be seen as a truly prospective prognosis. In a nutshell, a positive projection is this: the consequences of the new epidemic would be limited. China would lose less than one percentage point of growth, and then recover quickly; other economies of Southeast Asia would slow down; the rest of the world would hardly be affected (Russolillo, Chiu, 2020).
However, as it came to the end of March, the positive projection is not something we should take into account. Now economists are building models based on the speed of the virus spreading around the world: where the epidemic cannot be stopped. The virus spreads exponentially across the population. There are also positive aspects: China was able to curb the epidemic, although this required a temporary stop of the usual way of life in dozens of large cities. Several neighboring (and closely related) countries – such as Taiwan and Thailand – harshly stopped the spread of the virus at an early stage. True, these same tough measures, implying transport restrictions and social exclusion of millions of people, in themselves harm the economy (Wang, Y.Ng, Brook, 2020).
Separately, the scenarios consider the possible economic consequences of the epidemic itself and measures to combat it, as well as the effectiveness of the tools that the authorities of different countries use to support the economy. Most effects manifest as sharp shocks, which can:
- stop labor markets and trade;
- break the production chains of complex products;
- undermine public finances and monetary systems;
- change – locally or dramatically – the behavior of people and the structure of demand in the economy.
- For example, the Chinese economy has already begun to recover after the first blow of the epidemic – but it is doing it slowly. This is due to problems in the labor market: Chinese workers sent on indefinite leave at the end of January, according to the leaders of their companies, are in no hurry to return to work (AmCham Shanghai, 2020).
The largest financial agency Bloomberg has developed scenarios based on the wide-ranging model of the global economy NiGEM, which takes into account six thousand different parameters in 60 countries.
Mild scenario. The epidemic will be quickly defeated, China will suffer (or have already suffered), and recovery will take only a few months. These scenarios are the least likely.
Moderate scenario. What China went through, many countries will experience. One way or another, everyone will succeed by paying a heavy price to stop the spread of the virus. The global economy as a whole will restore growth by mid-2020, a global recession is unlikely. These scenarios are most likely. Like Morgan Stanley, one of the largest investment banks, predicts, as early as April, the central banks of developed countries, trying to support the economy, will lower interest rates to a minimum, surpassing records of soft monetary policy since the crisis of 2008-2009 (Ahya, 2020).
Bad scenario. Estimates by different researchers of what the word “disaster” means differ by orders of magnitude. They are also considering options in which there will be millions of victims in large countries (in Russia, a little less than a million), and the world economy will go into a deep recession. Very bad scenarios are now taken seriously (OECD, 2020).
Horrible scenario. One of the scenarios from Brookings describes a large epidemic that cannot be contained. It is based on the assumption that the virus is not seasonally prone, the second wave of the epidemic is coming to China, and control measures no longer work.
The number of infected continues to grow exponentially around the world. In the toughest scenario, up to 30% of the world’s population becomes infected. Medical systems of different countries are collapsing. Mortality is growing from 2% of the number of infected to 3% (in reality, mortality seems to be less than 2%).
Seasonal scenario. Coronavirus will turn into a semblance of seasonal flu. In this case, the epidemic will return every cold season for several more years, causing more and more losses: reduced demand, quarantines, and air travel bans. This will reduce the growth potential of the global economy in the coming years.
Obviously, the epidemic itself and the fight against it outside of China are just beginning. It is not yet possible to accurately predict their magnitude, but it is already clear that the consequences will be dire. Relations between countries collapsed before our eyes: for example, on March 11, US President Donald Trump almost completely closed the message between the US and Europe to citizens of other countries — and seriously limited it to Americans.
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References Ahya (2020), Coronavirus: Recession, Response, Recovery, https://www.morganstanley.com/ideas/coronavirus-impact-on-global-growth AmCham Shanghai (2020), Supply Chains and Factory Openings: An AmCham Shanghai Mini-Survey, https://www.amcham-shanghai.org/en/article/supply-chains-and-factory-openings-amcham-shanghai-mini-survey OECD (2020), OECD Interim Economic Assessment Coronavirus: The world economy at risk, http://www.oecd.org/berlin/publikationen/Interim-Economic-Assessment-2-March-2020.pdf Roche (2020). Roche’s cobas SARS-CoV-2 Test to detect novel coronavirus receives FDA Emergency Use Authorization and is available in markets accepting the CE mark, https://www.roche.com/media/releases/med-cor-2020-03-13.htm Russolillo, Chiu (2020). Investors Rattled by China’s Coronavirus Look to Past Epidemics for Clues, https://www.wsj.com/articles/investors-rattled-by-chinas-coronavirus-look-to-past-epidemics-for-clues-11579697553 Wang, Y.Ng, Brook (2020). Response to COVID-19 in Taiwan Big Data Analytics, New Technology, and Proactive Testing, https://jamanetwork.com/journals/jama/fullarticle/2762689